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Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

Article
Publication date: 1 February 2002

ROGER W. SPENCER and JOHN H. HUSTON

John Taylor devised a simple monetary policy rule that links the Federal Reserve's policy interest rate with inflation and output targets. This paper compares actual…

Abstract

John Taylor devised a simple monetary policy rule that links the Federal Reserve's policy interest rate with inflation and output targets. This paper compares actual policy rates with the rates that would have been recommended by the basic Taylor Rule for three long periods in U.S. economic history: 1875–1913 (“Pre Fed”), 1914–1951 (“Early Fed”), and 1952–1998 (“Modern Fed”). In addition, the authors develop a more complex version of the Rule to facilitate a comparison of the way in which each monetary authority would have reacted to the economic challenges presented outside its own time period. The empirical evidence suggests that Modern Fed would have reacted more promptly and appropriately to inflation and output problems outside its time period than either Early Fed or Pre Fed, and that the movement of interest rates in the Pre Fed period came closer to the corrective policies of Modern Fed than did those of Early Fed.

We would like to thank C. Y. Chen, Wenchih Lee, two anonymous referees and the seminar participants at the 2000 FMA annual meeting for their helpful comments and encouragement. All of the remaining errors are our responsibility.

Details

Studies in Economics and Finance, vol. 20 no. 2
Type: Research Article
ISSN: 1086-7376

Book part
Publication date: 24 March 2006

Pierre L. Siklos and Mark E. Wohar

Relying on Clive Granger's many and varied contributions to econometric analysis, this paper considers some of the key econometric considerations involved in estimating…

Abstract

Relying on Clive Granger's many and varied contributions to econometric analysis, this paper considers some of the key econometric considerations involved in estimating Taylor-type rules for US data. We focus on the roles of unit roots, cointegration, structural breaks, and non-linearities to make the case that most existing estimates are based on an unbalanced regression. A variety of estimates reveal that neglected cointegration results in the omission of a necessary error correction term and that Federal Reserve (Fed) reactions during the Greenspan era appear to have been asymmetric. We argue that error correction and non-linearities may be one way to estimate Taylor rules over long samples when the underlying policy regime may have changed significantly.

Details

Econometric Analysis of Financial and Economic Time Series
Type: Book
ISBN: 978-1-84950-388-4

Article
Publication date: 16 November 2015

Guobing Wu, Hao Zhang and Ping Chen

In this paper, six forms of non-linear Taylor rule have been applied to compare the fitting and prediction of response function of monetary policy of China, in an attempt…

Abstract

Purpose

In this paper, six forms of non-linear Taylor rule have been applied to compare the fitting and prediction of response function of monetary policy of China, in an attempt to figure out a form of non-linear Taylor rule that accords with Chinese practices. The paper aims to discuss this issue.

Design/methodology/approach

In this paper, the authors will conduct in-sample fitting and out-of-sample prediction on the response function of monetary policy of China by introducing the factor of exchange rate and by applying forward-looking, backward-looking and within-quarters non-linear Taylor rule with data from the first quarter of 1994 to the second quarter of 2011, with a view to provide reference for formulation and implementation of monetary policies of China.

Findings

By analyzing the experimental data, the authors find that first, after introducing the factor of exchange rate, both the implementation effect and prediction ability of the monetary policies improve. Exchange rate has a relatively greater influence on the effect of the monetary policies during low inflation period. Introduction of exchange rate can improve the prediction accuracy of our monetary policies significantly. Second, as the implementation effect of monetary policy under different macro-background varies greatly, the situation should be correctly appraised when formulating and implementing monetary policies. According to the empirical results, the monetary policies have obvious non-linear characteristics, and transit smoothly with the change of inflation rate. On the two sides of inflation rate of 2.174 percent, there is an asymmetry response.

Research limitations/implications

Surely, the conclusions are reached on the basis of quarterly data and one-step prediction method. It is no doubt that use of frequency mixing data including quarterly and monthly data will provide more sample information for studying relevant issues. And the use of multiple-step prediction method may cause a dynamic change of prediction indicators of models, which will help choose more appropriate prediction models. That is what the authors will study next.

Originality/value

First, by introducing exchange rate, this paper will extend non-linear Taylor rules and test its applicability and fitting effect in China. Second, figure out a non-linear Taylor rule that conforms to Chinese practices with data. In this paper, multiple forms of non-linear Taylor rules and actual macro date will be adopted for fitting and finding out a non-linear Taylor rule that fits Chinese practices. Third, empirical basis will be provided for further perfecting monetary policies prediction models. As there are few studies in connection with the prediction accuracy of non-linear Taylor rules so far, this paper will compare and study the prediction accuracy of non-linear Taylor rules by utilizing multiple advanced prediction techniques, so as to offer a beneficial thinking for predicting and formulating monetary policies by the central bank.

Details

China Finance Review International, vol. 5 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 1 February 2007

Subrata Ghatak and Willy Spanjers

The purpose of this paper is to discuss the potential benefits of monetary policy rules for transition economies (TEs).

1764

Abstract

Purpose

The purpose of this paper is to discuss the potential benefits of monetary policy rules for transition economies (TEs).

Design/methodology/approach

The paper discusses monetary policy rules, inflation targeting, political risk and ambiguity and monetary policy and ambiguity.

Findings

It is argued that the nominal interest rate may fail to be the appropriate instrument in such rules. One reason is the amount of non‐calculable political and economic risk inherent in TEs. These risks lead to a significant and volatile‐ambiguity premium in the interest rate over and above the normal risk premium, which makes the real equilibrium interest rate difficult to measure. Furthermore, ambiguity of the public regarding the monetary policy leads to an ambiguity premium on inflation.

Originality/value

The paper advocates a simple monetary policy rule based on a monetary aggregate like the money base minimizes the impact of ambiguity. It may therefore be the appropriate monetary policy for TEs.

Details

International Journal of Development Issues, vol. 6 no. 1
Type: Research Article
ISSN: 1446-8956

Keywords

Article
Publication date: 31 August 2012

Rizki E. Wimanda, Paul M. Turner and Maximilian J.B. Hall

The purpose of this paper is to evaluate the performance of six types of policy rules applied for Indonesia, using monthly data spanning January 1980 to December 2008.

1278

Abstract

Purpose

The purpose of this paper is to evaluate the performance of six types of policy rules applied for Indonesia, using monthly data spanning January 1980 to December 2008.

Design/methodology/approach

This paper uses deterministic simulations on a small macro model and evaluates the policy rules based on the loss function.

Findings

Among six types of policy rules, an inflation forecast‐based rule with contemporaneous output gap (IFBG) is found to be the most efficient rule for Indonesia. The rule suggests that the central bank should react strongly to inflation deviations from the target, react moderately to the output gap and smooth the interest rate. The optimal horizon is 3‐4 quarters. Including the exchange rate in the policy rule causes deterioration in economic performance.

Originality/value

No previous study examines Indonesia employing the same methodology.

Details

Journal of Economic Studies, vol. 39 no. 4
Type: Research Article
ISSN: 0144-3585

Keywords

Book part
Publication date: 1 July 2015

J. Huston McCulloch

The Taylor Rule’s Zero Lower Bound problem can be solved by pegging interest rates on longer-maturity loans than the 6 weeks implicit in the Fed’s current operating…

Abstract

The Taylor Rule’s Zero Lower Bound problem can be solved by pegging interest rates on longer-maturity loans than the 6 weeks implicit in the Fed’s current operating procedures. However, the Fed’s policy since 2008 of reducing the opportunity cost of excess reserves to zero (or even negative) has neutralized the stimulative effect of the Fed’s low interest rate policy. Eliminating interest on excess reserves would restore the effectiveness of monetary policy, but would require promptly unwinding the Fed’s “Quantatitve Easing” acquisitions.

It is argued that the Fed’s reaction function should contain no pure inertial terms, and that the “output gap” as originally conceived by Taylor is a statistical illusion. Although the unemployment gap is statistically meaningful, it is not clear that it should be directly included in the Taylor Rule unless it serves as a proxy for the equilibrium real interest rate.

Details

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

Keywords

Article
Publication date: 1 February 1988

Anthony Clunies Ross

The assignment of targets to instruments in developing countries cannot satisfactorily follow any simple universal rule. Which approach is appropriate is influenced by…

233

Abstract

The assignment of targets to instruments in developing countries cannot satisfactorily follow any simple universal rule. Which approach is appropriate is influenced by whether the economy is dominated by primary exports, by the importance of the domestic bond market and bank credit, by the extent of existing restriction in foreign exchange and financial markets, by the presence or absence of persistent high inflation, and by the existence or non‐existence of an active international market in the country's currency. Eighteen observations and maxims on stabilisation policy are tentatively drawn (pp. 64–8) from the material reviewed, and the maxims are partly summarised (pp. 69–71) in a schematic assignment, with variations, of targets to instruments.

Details

Journal of Economic Studies, vol. 15 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 6 November 2009

Alexis Penot and Grégory Levieuge

The purpose of this paper is to try to understand the reasons for the differences in amplitude of monetary policy (MP) rate cycles in the USA and the euro area. Among the…

Abstract

Purpose

The purpose of this paper is to try to understand the reasons for the differences in amplitude of monetary policy (MP) rate cycles in the USA and the euro area. Among the different candidates, the paper aims to test the role of economic structures, macroeconomic shocks, and MP behaviour.

Design/methodology/approach

The paper starts by estimating vector autoregressive models both for the USA and the euro area to identify the economic structures, the MP rules, and the macroeconomics shocks of both areas. Then, it runs counterfactual simulations (by injecting European Central Bank's (ECB) monetary rule in the US model for example) to examine which factors had the most significant impact on differences in MP activism (measured by the variance of interest rates).

Findings

The paper finds that differences implied by MP rules alone cannot explain the dissimilarity of interest rates paths. In the same way, while cyclical shocks are different in each area, they do not suffice to explain the factual divergences. Finally, it is the structural dissimilarities which essentially explain the difference in interest rate variances.

Originality/value

The paper brings new informations on a controversial issue and it tends to reject the official explanations given by ECB's governor who points out differences in shocks.

Details

Journal of Financial Economic Policy, vol. 1 no. 4
Type: Research Article
ISSN: 1757-6385

Keywords

Book part
Publication date: 13 May 2019

Rosaria Rita Canale and Rajmund Mirdala

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II…

Abstract

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.

This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.

Details

Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence
Type: Book
ISBN: 978-1-78743-793-7

Keywords

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